This week’s news included stories about nine famous businesses on the boardwalk at Coney Island that are closing down because their leases were not renewed by the new property managers. After several rounds of discussions, these businesses, including Ruby’s and Shoot the Freak, are being given just two weeks to pack up and leave.
What lesson can you learn from this that is relevant to outsourcing? Simply that, if you are a customer in an outsourcing transaction, you need to structure your agreement so that you are not given a rapid and graceless exit at the end of the deal.
A great deal of attention is typically paid to the provisions governing the transition in. Of course, the transition in is the first step after signing the deal, and it is staring you right in the face as you are negotiating. As part of the negotiations, the parties normally talk about what transition planning needs to occur, what things need to get done and how long it will take before the new supplier can go live in production. While that information is readily available, it is only logical that this information should be used to estimate what the back end transition out of the contract will be.
There will be various ways that the supplier can end the contract – by giving notice of non-renewal, termination for cause or perhaps some other basis for termination. The notice periods are not necessarily critical, provided that the client does not have to make a decision to keep or not keep the supplier. Where the client does need to make a decision – for example a notice of a price increase that the client must accept if it wants to renew – then the notice period must be long enough to allow the client to take the necessary steps. If those steps include an RFP process, as much as six months notice (or even more for very large deals) may be an appropriate notice period.
Regardless of the length of the notice period, the important thing is that the contract should not end at the conclusion of the notice period. Yes, I said the contract should NOT end at the end of the notice period for termination or non-renewal.
At the end of the typical contract notice period, the customer may not have had sufficient time to select a replacement vendor and allow that vendor to be ready to take over performance of the services. Accordingly, the supplier should be required to continue to perform the services at the then-current pricing (perhaps with an adjustment for inflation), for a sufficient period of time to allow the client to transition performance to a new provider. This is typically called a transition assistance period. The more flexibility that can be obtained in the length of the transition assistance period, the better. I have run into a number of instances in complex transactions where the transition from one vendor to another took months (and in a couple instances, more than a year) longer than expected. If the customer had not had the ability to require the former incumbent to continue to perform until the transition over to the new vendor was completed, the client would have been in a desperate situation. About as desperate as being given two weeks to move your business.